16 January 2013

Economic Autism

It appears that the economics profession exists merely to give autists the façade of productivity:
For most of modern history, two-thirds of the income of most rich nations has gone to pay salaries and wages for people who work, while one-third has gone to pay dividends, capital gains, interest, rent, etc. to the people who own capital. This two-thirds/one-third division was so stable that people began to believe it would last forever. But in the past ten years, something has changed. Labor's share of income has steadily declined, falling by several percentage points since 2000. It now sits at around 60% or lower. The fall of labor income, and the rise of capital income, has contributed to America's growing inequality.
What can explain this shift? One hypothesis is: China. The recent entry of China into the global trading system basically doubled the labor force available to multinational companies. When labor becomes more plentiful, the return to labor goes down. In a world flooded with cheap Chinese labor, capital becomes relatively scarce, and its share of income goes up. As China develops, this effect should go away, as China builds up its own capital stock. This is probably already happening.
But there is another, more sinister explanation for the change. In past times, technological change always augmented the abilities of human beings. A worker with a machine saw was much more productive than a worker with a hand saw. The fears of "Luddites," who tried to prevent the spread of technology out of fear of losing their jobs, proved unfounded. But that was then, and this is now. Recent technological advances in the area of computers and automation have begun to do some higher cognitive tasks - think of robots building cars, stocking groceries, doing your taxes.
This hand-wringing, though amusing, is predicated on a couple of fallacious assumptions.

First, there is a false dichotomy.  There are more than two explanations for why labor’s share of income has decreased by seven percentage points over the last ten years.  Sure, free trade play a role, as does increasing mechanization of production.  But there are other factors as well.  What this economist apparently fails to consider is why companies have an incentive to hire people on the other side of the globe, or why companies mechanize their production processes, instead of hiring people.  Unsurprisingly, he fails to consider whether government policies have contributed to this problem.  Additionally, he fails to consider whether labor was overvalued in the first place, and he also fails to account for black market labor.  Thus, his analysis rests on some incredibly shallow analysis.

In the second place, he makes the even more unfortunate mistake of assuming that end results are the only concern to all employers.  There’s a reason why, for example, Wendy’s hires pretty young girls to work the dining room registers:*  people are willing to pay more to be served by pretty girls.  Yes, they want the food, but the food is not the only possible concern they have about the transaction.  As such, there will always be a roughly consistent demand for human labor because people fundamentally want to be around other people.  Man is a social creature, after all.  There’s a reason why very few stores have switched completely to a self-service model of checkout lanes.

Thus, the assumption that machines will render human labor obsolete is fundamentally flawed because it ignores the fact that the most fundamental demand of all is for human labor for its own sake.  People want to interact with other people.  People want contact with other humans (hence prostitution).  People want to show that they can control other people.  And that’s why human labor will not be taken over by machines.

Now, there will undoubtedly be some instances in which human labor is driven out of certain market niches, but this simply means that human labor will need to find a new market niche.  A lot of people lost jobs in the cassette tape industry once CDs became big.  This hardly precipitated a permanent increase in the unemployment rate, or in labor’s share in income.  Likewise, the introduction of robotics will do little to impact the long-term collapse of the market for human labor.  At worst, it will be a drawn-out realignment.

* When I worked at Wendy’s, back in high school, my manager straight up told me that the reason I worked grill/fryer instead of front register was because guys. Especially those who were young and single, would spend more if they were served by a pretty girl.  Apparently he had tested this by comparing sales on a revolving basis (e.g. comparing Monday lunch sales to Monday lunch sales) and noted that the most consistent predictor of sales variability was the gender and appearance of the front register operator.